Free Money Grants vs. Small Business Loans: What Option Is Best For You? was written by Dana Wolk and originally appeared on Wealth of Geeks. Dana is a blogger with a master’s degree as a Literacy Specialist who has a long history of writing freelance articles for her blog, Debt Blogger, as well as writing for other companies and individuals who have needed content. She learned about finance and budgeting through her experience and years of tight budgeting and dealing with debt personally. It has been republished with permission. Please note that contributing opinions are that of the author. They are not always in strict alignment with our own opinions.
Being a small business owner is not the easiest way to earn a living, but it can be gratifying! Both new and established businesses go through transitions of growth and difficulty. You can look at various options for funding that will provide the money you need to continue and improve your business.
You must understand what you are applying for and what financial responsibilities come before applying for a grant or a loan. So we will be talking about the pros and cons between money grants and small business loans. This goal is to provide you with some clarity on the topic. We will be discussing a few of the loan options you will find. Check back soon for a more in-depth conversation on the wide variety of business loan types.
What Are Free Money Grants?
A grant is money provided to a business, individuals, educational institutions, or non-profits. Free money grants are offered by trusts, government departments, or corporations, and you will not have to pay the grant back in most cases.
Funding from free money grants finances businesses, organizations, or sometimes individuals, although that is most often an educational grant. The budget will need to be used in a specified way to meet the requirements of not having to pay back the loan.
Grants provide funding for certain facilities, charities, activities, or business ventures specified in the grant agreement. There are often requirements and limitations to qualify eligible candidates. Grants are not offered in all countries, but many do, such as the United States, the UK, and Canada. Grants often do not have to be paid back as long as the funds are allocated to what they are approved for.
Typically, government free money grants are provided as student financial aid, and organizations providing services that use the money to conduct services related to societal needs.
How Did Free Money Grants Become An Option To Provide Funding?
Today most grants are available for organizations rather than individuals. When grants first started, they were only available for organizations, and there were no options for individual grants. When free money grants originated, they were all funded by the federal government. These days, grants are organized and sponsored by non-profits, corporations, states, counties, and cities.
Today, many grants are available for all different causes and community needs. In the beginning, there were only a few options to apply for, and they were not easily acquired. Thee are approximately 10,000 options for grants currently available in the United States.
A new change that has come to light is that there are now specified options for women and minorities. If you are a woman looking for funding, a grant could be an excellent option. There are more grants for women than any other minority because they are the largest minority group in the United States and worldwide! Of all the fantastic opportunities available, women in business are number 1 for grant opportunities! There is so much opportunity if you look!
The options for individuals are still limited to educational funding, but organizations have a variety of grants to apply for. As a small business owner, you can look for grants that relate to the products and services to decide if you think you will qualify and want to apply!
Think Out Of The Box!
Do you own a food service business? You can apply for a grant covering community-based events that will provide funding to help you organize and pay for events that will allow you to showcase your product or service while doing something good for your community and your business!
What Is A Business Loan?
As an incorporated business owner, you can also consider applying for a business loan. A business loan is funding provided for business owners who qualify for the terms the lender requires. This allocation must be paid back with interest according to the terms set by the lender. Terms are set before funding is provided, so make sure you know the obligation before moving forward. There are various options available for taking out a business loan.
SBA and traditional bank loans require more than many private online lenders. Loan qualifications for more business loans are based on business revenue. Some require a higher credit score than others. Typically the lower the credit score, the higher the interest rate, so be very aware of what you apply for and agree to before signing off on anything.
What Should Business Loans Fund?
Unlike free money grants, the funding provided by a business loan can be allocated as you, the business owner, feel it is needed for growth, debt payments, daily overhead, etc.
For many business owners who have been struggling through a challenging economic period caused first by the pandemic and now made more difficult by inflation, the funds can be used to help pay for bills the business owner can't cover at the time. The loan provides borrowed capital based on the business's revenue and other lender-specific requirements. Each lender's specific qualifications are another reason to know what you sign up for if approved for funding.
Some lenders will want to know what specific business expenses will be covered by the money provided in the loan. As the business owner, you can decide where the funds are allocated, but you should go into this process with a plan to prove the money will be used on the business if you are funded. It is helpful to prepare in advance and make a spreadsheet of how much of the loan amount you want to be used if you are approved. If you cannot provide this information and require it for your application, your loan will likely be denied.
What Options Are There For Business Loans?
There are a variety of options when choosing a loan. Some of the options include:
Traditional Bank Loans
The most common and difficult to qualify for is a traditional bank loan. Their qualifications may change depending on the current economic situation. Our current economy has caused banks to become more selective because there is more risk in lending to businesses in a weak or struggling economy. The upside to a traditional bank loan is that they often offer the best terms in a thriving economy if you can qualify!
The Small Business Administration is the government agency that financially backs business loans offered to business owners by lenders and banks. This type of loan is a solid option, just like a bank loan. Also, like a bank loan, it is not a short or easy process to go through, but worth trying because you will get excellent terms if you are approved in most cases.
It helps if you consider the pros and cons of each loan type before you decide. For example, SBA loans allow applying for up to $5 million with longer repayment terms than other loans and often the lowest rates on the market. Still, it is a rigorous process to apply for. Before you apply, look at your finances to make sure you can wait out the often extended wait and application time these loans take to process.
These loans are a good option for business owners who need financing in a limp sum but don't qualify for a bank or SBA loan. There are so many online loan providers it helps to show around for the best terms or work with a broker who will find the best terms for you!
Most lenders allow applications up to $1 million and often provide much faster funding than banks and SBA loans. You will most likely pay higher terms than you would with an SBA or traditional bank loan, but you will have to decide your best option based on your circumstances—looking again at the pros and cons. A term loan is a quick funding option that is easier to qualify for and will get you funding faster than SBA and traditional bank loans.
This is the last type of loan we will cover here, but we will have more comparisons soon! Make sure you know about all of your loan options to determine what works best for your business! There is no guarantee that you will qualify, but you won't know until you try! If this option does not work for you, you can look into business lines of credit or equipment financing as other options!
As a small business owner, only you truly know what funding option is best for your business. Free money grants have a lot of positive aspects, giving you the money you need while also providing opportunities to do positive things for your community!
The downside to a free money grant is that the money needs to be used for specific allocations depending on the grant requirements. The ultimate upside is that, in most cases, you won't need to pay it back!
Choosing a loan gives you more options and freedom to spend the money on various needs for your business, but you will have terms to pay the loan back. Either way, you are taking the first steps you need to be able to get funding and thrive!